Frequently Asked Questions
Let us clear your queries
Real estate equity equals the difference between a property’s value and the total value of registered interest (e.g., mortgages, liens) secured against it.
An equity investment refers to an investment via secured guarantee against residential real estate. There is no cash outlay. Our novel financial product makes this investment mechanism possible. As an investor you do not need to move cash out of your portfolio or compromise return on any underlying real estate asset. Instead, Our Leg Up (OLU) puts your equity to work and boosts your total return on real estate you own.
Equity investments are limited to 80% of the property value, less the total value of registered interest (e.g., mortgages, liens) secured against it. The property price is determined by a formal valuation conducted by qualified professional and arranged by OLU.
Both your principal place of residence and investment properties with a loan to valuation ratio (LVR) below 80% can be used for an equity investment.
- OLU aggregates equity investments from established homeowners who have equity in their property. The equity is then fractionalised and diversified for a pool of aspiring homeowners who have qualified for a prime mortgage but have a low deposit.
- This means it is diversified on both ends, and in particular for investors (aim is 1 investor across 50 borrowers). This eliminates any 1-to-1 risk.
- Equity investments are used as collateral for the difference between 20% of the borrower’s property price and their deposit.
- The bank issues funds for the entire loan – OLU does not lend any cash.
Generally, yes. Investors can have a registered interest on their property from any bank. Explicitly, they are not required to refinance loans on their properties to invest.
This is a conversation between your bank and OLU’s partner bank. The procedure varies by state. In most states it is a straightforward process but in NSW banks can refuse. That is unlikely because 1-to-1 guaranteed loans are a well understood arrangement. In the instance your bank refuses, we can register an alternative security against your property to enable investment.
Yes - while invested, this would reduce your borrowing capacity. The primary benefit here is that you can earn a return on equity you currently may not have access to due to borrowing capacity constraints.
Investors earn the market return on their existing property and an additional payment for committed equity investments (4.0% p.a. base case, net of fees) boosting total return on real estate.
- Base case return calculated after netting out the impact of risk mitigation measures (including allowance for defaults and foreclosures, 15% additional buffer of uncommitted equity investments) and OLU’s fees.
- Fluctuations in property prices impact the annualised return. We’ve assumed house price appreciation of 6.8% p.a. based on the average over the past 25 years (until Apr-18, excludes the recent boom).
We will eventually have additional products that leverage the same novel investment mechanism and offer different risk to return profiles.
- For Aspiring homeowners to be eligible to use our product, new borrowers will be locked into principal and interest repayments until they hit 80% loan-to-value (LVR) ratio. This is generally required by all banks for high LVR borrowers.
- Appreciating house prices mean this target ratio is achieved faster, at which point the encumbrance on additional collateral is released. The primary impact of house prices dropping is that the time new borrowers take to achieve 80% LVR may be longer than anticipated, decreasing annualised returns to our Investors.
- Devaluation of the market would not trigger any covenants from OLU regarding the value of your Investment
- We only accept borrowers who have already passed the bank’s pre-approval process, on top of which we add OLU’s vetting criteria.
- Australian residential mortgages amongst the safest in the world, structured as full recourse loans, with low delinquency (<0.9%) and foreclosure (<0.2%) risk by international standards. Negative equity is an even smaller fraction of foreclosures. In event of default, first the borrower's property is sold to recoup losses, following which any negative equity would need to be resolved by OLU.
- We have a first loss bucket (capital reserves) to front the impact of any negative equity and net this from investor returns. Any loss would also be diversified across 50+ borrowers so the impact on return is diluted. The base case return already factors in the likelihood of defaults in AU and nets out all fees.
- Based on our product structure and risk mitigating mechanisms (pg. from IM), even a 10x increase in default rates (akin to US GFC) would not lead to any investors being called upon. This is also because we limit our exposure – all home buyers undergo stringent loan serviceability assessments and need to be extended a prime mortgage from our partner banks to qualify.
Worst case scenario, where all our risk mitigating mechanisms have been exhausted, we would need to ask investors to contribute cash
- Scenario: House forecloses with $50k negative equity
- Depleted funds and all other techniques to cover losses
- Ask investor base associated with the property for pro-rata contribution depending on proportion of equity pledged (e.g., ~50 investors equally split would need to contribute $1k each) Based on our risk model and product structure, the circumstance required for this to happen is if more than 1 in 9 borrowers’ properties we support foreclose. For frame of reference, AU foreclosure rate is less than 1 in 500. In the US, during the GFC this lifted to 10x (<10 in 500).
Recommended term is 3 - 5 years, and investors would need to provide ~3 months’ notice to exit (or less pending availability of pledges). This is similar to Plenti (formerly RateSetter) in that there needs to be coverage to switch investors. Our product has 15% additional coverage built in for all loans, so there’s a base level of liquidity. There is also a waitlist of qualified investors waiting to commit equity. As the platform grows, liquidity will increase.
Upon early exit, investors will be paid out for their risk exposure (pro-rata) Equity investments can be shifted from one property to another (security substitution) e.g., if moving houses but intend to continue the investment.
To increase the size of the mortgage on a property you have used to invest equity, you may first need to decrease the size of your investment.